ctib20210331

10-Q 1 ctib20210331_10q.htm FORM 10-Q ctib20210331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File Number

000-23115

YUNHONG CTI LTD.

(Exact name of registrant as specified in its charter)

Illinois		36-2848943
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

22160 N. Pepper Road
Barrington, Illinois		60010
(Address of principal executive offices)		(Zip Code)

(847)382-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

Common Stock, no par value per share

CTIB

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares outstanding of the registrant’s common stock, no par value per share, as of May 20, 2021 was 5,886,750 (excluding treasury shares).

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INDEX

PART I – FINANCIAL INFORMATION

Item No. 1.	Financial Statements
	Condensed Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020 (audited)	1
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2021 and March 31, 2020	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2021 and March 31, 2020	3
	Condensed Consolidated Statements of Shareholders' Equity (unaudited) for the three months ended March 31, 2021 and March 31, 2020	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item No. 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item No. 3	Quantitative and Qualitative Disclosures Regarding Market Risk	25
Item No. 4	Controls and Procedures	25

PART II – OTHER INFORMATION

Item No. 1	Legal Proceedings	26
Item No. 1A	Risk Factors	26
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item No. 3	Defaults Upon Senior Securities	26
Item No. 4	Mine Safety Disclosures	28
Item No. 5	Other Information	28
Item No. 6	Exhibits	29
	Signatures	29
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

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Yunhong CTI, LTD

Condensed Consolidated Balance Sheets

	March 31, 2021			December 31, 2020
ASSETS		(Unaudited)
Current assets:
Cash and cash equivalents	$	85,605		$	429,457
Accounts receivable		7,241,714			5,013,195
Inventories, net		10,922,713			10,969,711
Prepaid expenses		733,891			589,149
Other current assets		1,341,046			1,352,419
Income Tax Receivable		196,747			403,074
Receivable from related party		100,000			100,000
Assets of discontinued operations		204,651			294,219

Total current assets		20,826,367			19,151,224

Property, plant and equipment:
Machinery and equipment		19,824,315			19,833,903
Building		3,321,016			3,321,016
Office furniture and equipment		2,161,061			2,231,458
Intellectual property		783,179			783,179
Land		250,000			250,000
Leasehold improvements		147,416			407,476
Fixtures and equipment at customer locations		518,450			518,450
Projects under construction		71,206			71,206
		27,076,643			27,416,688
Less : accumulated depreciation and amortization		(25,233,487	)		(25,466,213	)

Total property, plant and equipment, net		1,843,156			1,950,475

Other assets:
Operating lease right-of-use		791,211			361,720
Other assets		86,474			87,552

Total other assets		877,685			449,272

TOTAL ASSETS	$	23,547,208		$	21,550,971

LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade payables	$	6,118,676		$	5,504,442
Line of credit		6,746,160			5,363,340
Notes payable - current portion		3,687,100			3,913,666
Advance from Investor		-			1,500,000
Notes payable affiliates - current portion		-			8,045
Notes payable - officers, subordinated		1,140,709			1,123,769
Operating Lease Liabilities		633,447			317,591
Accrued liabilities		1,124,974			871,761
Liabilities of discontinued operations		115,343			184,577

Total current liabilities		19,566,409			18,787,191

Long-term liabilities:
Operating Lease Liabilities		157,764			44,129

Total long-term liabilities		157,764			44,129


TOTAL LIABILITIES		19,724,173			18,831,320

Mezzanine equity:
Series B Preferred stock -- no par value, 170,000 shares authorized 170,000 shares issued and outstanding at March 31, 2021 and December 31, 2020		-			1,532,164

Equity:
Yunhong CTI, Ltd shareholders' equity:
Series A Preferred Stock -- no par value, 3,000,000 shares authorized, 500,000 shares issued and outstanding at March 31, 2021 December 31, 2020 (liquidation preference - $5.0 million as of March 31, 2021)		2,854,583			2,754,583
Series B Preferred Stock -- no par value, 170,000 shares authorized, 170,000 shares issued and outstanding at March 31, 2021 and December 31, 2020		1,612,707			-
Series C Preferred Stock -- no par value, 170,000 shares authorized, 170,000 shares issued and outstanding at March 31, 2021 and nil at December 31, 2020 respectively		1,528,333			-
Common stock - no par value, 50,000,000 shares authorized, 5,930,408 and 5,827,304 shares issued and 5,886,750 and 5,783,646 shares outstanding at March 31, 2021 and December 31, 2020 respectively		14,537,828			14,537,828
Paid-in-capital		4,832,635			5,041,511
Accumulated deficit		(14,804,490	)		(14,382,327	)
Accumulated other comprehensive loss		(5,901,379	)		(5,885,112	)
Less: Treasury stock, 43,658 shares		(160,784	)		(160,784	)
Total Yunhong CTI, Ltd Shareholders' Equity		4,499,433			1,905,699

Noncontrolling interest		(676,398	)		(718,212	)

Total Shareholders' Equity		3,823,035			1,187,487

TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY	$	23,547,208		$	21,550,971

See accompanying notes to condensed consolidated unaudited financial statements.

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Yunhong CTI, LTD

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	For the Three Months Ended March 31,
	2021			2020

Net Sales	$	7,416,168		$	7,067,501

Cost of Sales		6,322,975			5,586,059

Gross profit		1,093,193			1,481,442

Operating expenses:
General and administrative		1,120,350			702,431
Selling		32,753			53,754
Advertising and marketing		106,566			120,829
Gain on sale of assets		-			(25,684	)

Total operating expenses		1,259,669			851,330

Income (Loss) from operations		(166,476	)		630,112

Other (expense) income:
Interest expense		(231,159	)		(441,177	)
Other Expense		(57,693	)		(42,334	)
Foreign currency loss		(26,383	)		(154,083	)

Total other expense, net		(315,235	)		(637,594	)

Loss from continuing operations before taxes		(481,711	)		(7,482	)

Income tax expense		-			-


Loss from continuing operations		(481,711	)		(7,482	)


Gain (loss) from discontinued operations, net of tax		101,362			(486,637	)

Net Loss	$	(380,349	)	$	(494,119	)

Less: Net (loss) income attributable to noncontrolling interest		41,814			144,577

Net loss attributable to Yunhong CTI, Ltd	$	(422,163	)	$	(638,696	)

Other Comprehensive Income (Loss)
Foreign currency adjustment		(16,267	)		(1,363,503	)
Comprehensive Loss	$	(396,616	)	$	(1,857,622	)

Deemed Dividends on preferred stock and amortization of beneficial conversion feature	$	(1,708,876	)	$	(2,380,944	)

Net Loss attributable to Yunhong CTI Ltd Shareholders	$	(2,131,039	)	$	(3,019,640	)

Basic income (loss) per common share
Continuing operations	$	(0.38	)	$	(0.64	)
Discontinued operations		0.02			(0.12	)
Basic income (loss) per common share	$	(0.36	)	$	(0.76	)

Diluted income (loss) per common share
Continuing operations	$	(0.38	)	$	(0.64	)
Discontinued operations	0.02				(0.12	)
Diluted income (loss) per common share	$	(0.36	)	$	(0.76	)

Weighted average number of shares and equivalent shares of common stock outstanding:
Basic		5,854,861			3,973,093

Diluted		5,854,861			3,973,093

See accompanying notes to condensed consolidated unaudited financial statements.

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Yunhong CTI, LTD

Condensed Consolidated Statements of Cash Flows (Unaudited)

	For the Three Months Ended March 31,
	2021			2020

Cash flows from operating activities:
Net loss	$	(380,349	)	$	(494,119	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization		124,197			294,003
Amortization of ROU Asset		152,053			235,368
Amortization of deferred gain on sale/leaseback		-			(25,684	)
Provision for losses on accounts receivable		12,176			10,492
Provision for losses on inventories		-			3,770
Change in assets and liabilities:
Accounts receivable		(1,859,940	)		797,188
Inventories		(15,756	)		241,530
Prepaid expenses and other assets		(212,159	)		133,257
Trade payables		752,689			(157,864	)
Change in ROU Liability		(152,053	)		(235,368	)
Accrued liabilities		158,480			39,729

Net cash (used in) provided by operating activities		(1,420,662	)		842,302

Cash flows from investing activities:
Purchases of property, plant and equipment		(45,784	)		(18,526	)

Net cash used in investing activities		(45,784	)		(18,526	)

Cash flows from financing activities:
Repayment of debt and revolving line of credit		-			(4,716,429	)
Proceeds from issuance of Series A preferred stock		-			3,626,600
Cash paid for stock issuance costs		-			(570,160	)
Cash paid for deferred financing fees		-			(39,722	)
Proceeds from issuance of long-term debt and revolving line of credit		1,557,444			-

Net cash provided by (used in) financing activities		1,557,444			(1,699,711	)

Effect of exchange rate changes on cash		(554,714	)		190,942

Net decrease in cash and cash equivalents		(463,716	)		(684,993	)

Cash and cash equivalents at beginning of period		624,953			845,098

Cash and cash equivalents at end of period	$	161,237		$	160,105
The cash flows related to discontinued operations of $75,632 and $6,073 as of March 31,2021 and 2020, respectively have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.”

Supplemental disclosure of cash flow information and noncash investing and financing activities:
Cash payments for interest	$	194,882		$	441,000
Accrual for stock issuance costs	$	-		$	250,000
Conversion of debt to Series A Preferred	$	-		$	478,000
Accrued Divided and Accretion on preferred stock	$	208,876		$	53,000
Issuance of Placement agent warrants in connection with Series A Preferred offering	$	-		$	753,000
Issuance of Common stock to placement agent	$	-		$	306,000
Issuance of Series C Preferred in exchange from advance from investor	$	1,500,000		$	-
Lease right-of-use assets and lease liability	$	567,950		$	-
Amortization of beneficial conversion feature and deemed dividend on Series C Preferred stock	$	1,500,000		$	2,300,000

See accompanying notes to condensed consolidated unaudited financial statements.

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Yunhong CTI, Ltd

Consolidated Statements of Shareholders' Equity

	Yunhong CTI, Ltd
	Three Months Ended March 31, 2020
																								Accumulated
	Series A					Series B				Series C											Accumulated			Other			Less
	Preferred Stock					Preferred Stock				Preferred Stock				Common Stock				Paid-in			(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount			Shares		Amount		Shares		Amount		Shares		Amount		Capital			Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance December 31, 2019		-	$	-			-	$	-		-	$	-		3,879,608	$	13,898,494	$	3,587,287		$	(9,992,841	)	$	(5,348,812	)		(43,658	)	$	(160,784	)	$	(856,837	)	$	1,126,507

Convertible Preferred Stock Issuance - cash		362,660		3,509,933											140,000		116,667																				3,626,600
Convertible Preferred Stock Issuance - conversion of debt		48,200		478,017																																	478,017
Common stock issued for placement agent fees				(306,000	)										200,000		306,000																				-
Warrants issued to placement agent and other issuance costs				(752,924	)														752,927
Placement agent fees and issuance costs				(820,160	)																																(820,160	)
Beneficial Conversion feature (BCF) on Series A Preferred Stock				(2,328,473	)														2,328,473																		-
Deemed Dividend on BCF of Series A Preferred Stock				2,328,473															(2,328,473	)																	-
Accrued Deemed Dividend - Series A Preferred Stock				52,741															(52,741	)																	-
Net Loss																						(638,696	)											144,577			(494,119	)
Foreign Currency Translation																									(1,363,503	)											(1,363,503	)
Balance March 31, 2020		410,860	$	2,161,607			-	$	-		-	$	-		4,219,608	$	14,321,161	$	4,287,473		$	(10,631,537	)	$	(6,712,315	)		(43,658	)	$	(160,784	)	$	(712,260	)	$	2,553,342

	Three Months Ended March 31, 2021
																							Accumulated
	Series A				Series B				Series C											Accumulated			Other			Less
	Preferred Stock				Preferred Stock				Preferred Stock				Common Stock				Paid-in			(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital			Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance December 31, 2020		500,000	$	2,754,583		-	$	-		-	$	-		5,827,304	$	14,537,828	$	5,041,511		$	(14,382,327	)	$	(5,885,112	)		(43,658	)	$	(160,784	)	$	(718,212	)	$	1,187,487

Series C Convertible Preferred Stock Issuance										170,000		1,500,000																								1,500,000
Series B Convertible Preferred Stock Modification						170,000		1,612,707																												1,612,707
Convertible Preferred Stock Issuance - conversion of debt																																				-
Common stock issued for warrants exercised - cashless														103,104
BCF on Series C Preferred Stock																		1,500,000																		1,500,000
Deemed Dividend on BCF of Series C Preferred Stock																		(1,500,000	)																	(1,500,000	)
Accrued Deemed Dividend - Series A Preferred Stock				100,000				-				-						(100,000	)																	-
Accrued Deemed Dividend - Series B Preferred Stock																		(33,611	)																	(33,611	)
Accrued Deemed Dividend - Series C Preferred Stock												28,333						(28,333	)																	-
Accretion of Series B Preferred Stock																		(46,932	)																	(46,932	)

Net Loss																					(422,163	)											41,814			(380,349	)
Foreign Currency Translation																								(16,267	)											(16,267	)
Balance March 31, 2021		500,000	$	2,854,583		170,000	$	1,612,707		170,000	$	1,528,333		5,930,408	$	14,537,828	$	4,832,635		$	(14,804,490	)	$	(5,901,379	)		(43,658	)	$	(160,784	)	$	(676,398	)	$	3,823,035

See accompanying notes to unaudited condensed consolidated financial statements

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Yunhong CTI Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

The accompanying condensed (a) consolidated balance sheet as of March 31, 2021 and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2020.

Principles of consolidation and nature of operations:

Yunhong CTI Ltd, its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products. As discussed in Note 2 Discontinued Operations, effective in the third quarter of 2019, the Company determined that it was exiting the business formerly conducted by CTI Europe GmbH (“CTI Europe”). Accordingly, the operations of this entity are classified as discontinued operations in these financial statements.

The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd., and CTI Supply, Inc. and its majority owned subsidiaries, Flexo Universal and CTI Europe, as well as the accounts of Venture Leasing S. A. de R. L.

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity.

Use of estimates:

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts and inventory valuation, and assumptions used as inputs in the Black-Scholes option-pricing model.

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Earnings per share:

Basic (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period.

Diluted (loss) per share is computed by dividing the net loss by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.

As of March 31, 2021 and 2020, shares to be issued upon the exercise of options and warrants aggregated nil and 632,660, respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended March 31, 2021 and 2020 were none, as doing so would have been anti-dilutive.

Significant Accounting Policies:

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2020. There were no significant changes to these accounting policies during the three months ended March 31, 2021.

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.

The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

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Note 2 – Discontinued Operations

In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The disposal of CTI Europe was delayed due to COVID issues but is expected to be completed in the next three months. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019.

In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. Our exit of the Ziploc® product line is considered a strategic shift and had a major effect on our operations and financial results. Therefore, this product line has been presented as discontinued operations.

CTI Europe recorded a gain from discontinued operations, net of taxes of $52,708 and $317,000 for the three months ended March 31, 2021 and March 31, 2020, respectively.

Our Ziploc product line recorded a loss from discontinued operations, net of taxes of nil and ($804,000) for the three months ended March 31, 2021 and March 31, 2020, respectively.

Summarized Discontinued Operations Financial Information

The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Unaudited Consolidated Statements of Income for the three months ended:

	March 31, 2021			March 31, 2020
Income Statement
Net Sales		79,833			1,057,058
Cost of Sales		126,906			1,174,045

Gross Loss	$	(47,073	)	$	(116,987	)


SG&A		92,266			524,550

Operating Loss	$	(139,339	)	$	(641,537	)

Other Expense		9,963			13,220

Total pretax loss from discontinued operations	$	(149,302	)	$	(654,757	)

Gain from classification to held for sale		250,664			168,120

Net Income (Loss) prior to non-controlling interest	$	101,362		$	(486,637	)

Non-controlling Interest share of profit/loss		48,654			152,094

Net Income (Loss)	$	52,708		$	(638,731	)

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The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:

Yunhong CTI Ltd.

Unaudited Consolidated Balance Sheet

SEC Form 10-Q filed by Yunhong CTI Ltd.